The government, letting agencies, property developers and non-resident investors in buy-to-let property in the UK should be watching a property tax battle in Spain very closely. It could put an immovable roadblock on the proposed 1% stamp duty surcharge on property purchases for non-resident investors in UK property.

What is the stamp duty surcharge in the UK?

The government has proposed that non-resident buyers of UK property should pay an extra 1% stamp duty, on top of the basic rates of stamp duty and the 3% surcharge on second properties. The proposal is that the extra 1% should be charged irrespective of the property’s value.

The proposal is currently in a consultation period, though the government could be waiting to announce its review until it sees what happens in Spain. The tax authorities there are in a battle with the EU.

What does Spain have to do with stamp duty in the UK?

Like the government in the UK, the Spanish government wants to increase its income. But, after a long period of austerity, increasing taxes is not popular.

Like in the UK, popularist parties are gaining a foothold in politics. If there is one thing you can rely on politicians to do, it is to look after their own jobs. In fact, it’s probably the only thing you can expect politicians to do.

To square this circle, the Spanish government’s answer has been like that of the UK government. Raise taxes on foreigners. Especially foreigners who invest in domestic property. And even better if it’s on rental property. Evil landlords deserve to be taxed! Evil, non-resident landlords deserve to be taxed even more!

This brings me to Spanish tax law on rental property. Currently, if you are a Spanish resident and let a home (what the Spanish call a ‘habitual residence’), you receive 60% tax relief on your net rental income. Non-residential property investors are not eligible for this. They must pay the full amount of tax to the Spanish tax authorities. Popular with Spanish voters. Not popular with the EU.

The EU says you can’t treat non-residents differently

Here’s the rub. Under EU law, you cannot treat non-residents differently to residents. It is discriminatory. Spain’s treatment of resident and non-resident property investors gives Spanish resident investors an unfair advantage. They pay less tax.

The EU laws that this treatment contravenes is covered under Article 63 of the Treaty on the Functioning of the European Union (TFEU). Spain’s taxes on non-resident investors may be popular with the Spanish, and it may raise extra revenue, but it is a car crash when it comes to free movement of capital. That’s what the European commission has concluded.

What happens next?

The European Commission is serious about this. In March, it sent Spain a letter of formal notice.

Ok, so a letter doesn’t sound like much, but it is the first step in a formal infringement procedure. Spain’s government has two months to provide a detailed reply. If that reply isn’t convincing enough, the European Commission will then send back a ‘reasoned opinion’.

The reasoned opinion will set out the exact reasons why the European Commission considers Spain is violating EU law. Simultaneously, the European Commission will formally request that Spain comply with EU law. It will give Spain a further period (usually two months) to report what measures it has adopted in order to comply.

If Spain doesn’t comply with the European Commission’s directive, the EU could take court action. Spain could be taken to the European Court of Justice (ECJ) and face a legal battle. That could take years.

It wouldn’t be the first time that Spain has found itself in contravention of EU laws of the freedom of movement of capital. In fact, it is due to appear in the ECJ later this year. It will be contesting that the penalties it applies under its ‘Modelo 720’ are fair and proper.

The Modelo 720 case started in 2012. That is when the Modelo 720 was introduced in Spain. It requires that a resident’s foreign assets over €50,000 (in total) are reported to the Spanish tax authorities. If you don’t report them, the fines you face are draconian – €5,000 for each piece of information with a minimum of €10,000. If you are late reporting, the fine is a minimum of €1,500.

The EU started its infringement procedure against Spain for the Modelo 720 case in 2014. Five years later, and it is only now to be heard in the ECJ.

So, what does this all mean?

There’s a global trend toward spanking foreigners with taxes whenever possible. Governments are desperate to raise tax through popular measures. Here in the EU, it is difficult for EU members to do so. The EU considers it to be discriminatory, and against at least one of its guiding principles. And you don’t break the EU’s guiding principles.

The UK government is likely to play a waiting game. It could introduce the new surcharge, but it will then undergo the same procedure as is happening to Spain. And that could take years to process.

For the time being, we are in limbo. We don’t expect implementation any time soon.

Are you a non-resident property investor? Stay up to date with all the buy-to-let news that matters to you. To learn more about our comprehensive services for non-resident landlords, contact Ezytrac at +44 0 1522 503 717.

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Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Ezytrac. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain.
Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.
Brett holds both the Level 3 Property Mark Qualifications for Property Sales and Property Lettings and Management.